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GAM ‘dances close to the door’ in crowded credit trades

By: | 02 Apr 2012

Some of GAM’s bond funds have bought into high yield credit but they are “dancing close to the door” as the manager feels this trade is one of various crowded areas presenting significant dangers to participants because of the trade is crowded.

Tim Haywood (pictured), investment director at the Swiss asset manager, said in his recent discussions with private client advisors, hedge funds and consultants, four trades have come up again and again.

These are short US duration, short the euro, short bonds of Europe’s troubled indebted nations and short sovereigns generally, and “key overweights” in corporate bonds including high yield.

“There is surprising uniformity across these stances, which raises concern that the price path for some of these sectors could be painful. For instance, we do not expect a high default rate from corporate bonds while their credit fundamentals remain good – but this will not necessarily translate into strong market performance by corporate bonds,” Haywod said.

“Similarly, the euro may reach a much higher level versus the US dollar, but on the way to a more justifiable lower value.”

Haywood, who spoke in regards the GAM Absolute Return Bond Fund and GAM Star Dynamic Global Bond funds, said October’s strong rally of the euro to the Greenback was “arguably unjustified given the subsequent wobbles in November and eventual Greek default [but] this kind of spike is a possibility while such crowded positions persist.

“When added to the decline in surprises, this helps to explain why we are temporarily closing our US duration short.”

While Haywood said he had long positions in high yield – another consensus trade because “people have greater trust in corporations than they do in sovereigns” – this made the trade a crowded one, and his funds were therefore ‘dancing close to the door’ by using liquid high yield indices more than individual cash bonds.

He said companies benefited in the current low rate environment by cheap finance, but “the demand for high-yield bonds in the US is extraordinary and so is the demand for new deals [and] the concern is that secondary market liquidity is not great”.